Determine Your Appetite for Investment Risk in 5 Steps
There’s a degree of risk in any financial investment. There are no sure winners and no sure losers, either. How comfortable you are with the latter statement may help when it comes to determining your own tolerance for risk. Think of it not only as how much you are willing to lose on your investments but rather how much uncertainty you can live with from day to day.
How often do you check the stock ticker on your smartphone? Does it fill you will dread or excitement? These are the kinds of questions you should be asking yourself. The answers will, in turn, help you pick out an investment portfolio that’s right for you.
1. A Personality Test
The individual identity component of risk tolerance assessment shouldn’t be ignored. Some of your risk tolerance can be measured, meaning that the amount of risk you can tolerate is based on factors like your age or your income. However, you may simply dislike making risky investments. That’s okay. You should be comfortable with spending (or not) your money the way you like.
2. What are Your Financial Goals?
Do you save money to accumulate wealth or are you looking for ways to retire early? If your only goal is to have adequate savings to retire on when you’re 70, slow and steady is your investment pace. You’re looking to have a steady accumulation over time that will provide for a happy retirement. On the other hand, if you want to hang up your stethoscope while you’re still relatively young, you’ll be looking for investments that have a higher risk/reward ratio. You don’t mind some volatility if it can get you to the finish line faster.
These retirement-focused goals aren’t the only goals that can impact your investment strategy. You may be saving for a house or considering starting your own practice.
3. How Much Time Do You Need?
If you’re relatively young, you have plenty of time to ride out the peaks and valleys of the economy. You can tolerate a little more risk by design. However, if you have a goal you need to meet quickly (buying a home) or you are nearing retirement age, you may want to think more conservatively so that you don’t lose too much money when you need it most.
4. Your Wealth and Income
If you have $5 million to invest, you can take more chances than you should if you have $50,000. That’s fairly straightforward. You may also consider additional factors, such as the amount of debt you’re carrying, or whether your personal ecosystem (career, family, assets, etc.) is strong and stable.
5. Get Good Advice
Even if you’ve asked yourself the tough questions, you may still want to conduct a risk assessment with an experienced financial advisor to help map out a strategy going forward. You may find that you are not as risk averse or risk tolerant as you had originally thought. This is just one way you can learn about yourself and make better decisions regarding your financial future.
If you need a professional advocate or simply want a second opinion, please see the calendar link below to schedule a convenient time to chat.
This content is developed from sources believed to be providing accurate information, and provided by My NP Advisor. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.